Dynamic Effects In Merger Control: European Commission Has Published New Economic Study

The European Commission (“Commission”) has published its “Economic Study on the Dynamic Effects of Mergers”, examining how mergers may affect innovation, investment and competition in future product markets.

Prepared by Oxera and drawing on more than 450 academic publications, the study is intended to provide an analytical foundation for the Commission’s ongoing review of the 2004 Horizontal Merger Guidelines and the 2008 Non-Horizontal Merger Guidelines.

The study’s key findings include:

• Dynamic effects encompass not only changes in incentives to innovate and invest, but also the impact of mergers on market entry, future product-market competition and the price, quality, variety and availability of new or improved products. These effects may amplify, mitigate or counterbalance a merger’s static effects.
• Given the uncertainty surrounding future competitive outcomes, the study proposes an “Expected Consumer Welfare” standard that considers both the probability of an outcome and the magnitude of its potential impact on consumers.
• Horizontal mergers may eliminate future product-market and investment competition between the merging parties. In the absence of spillovers or dynamic synergies, such transactions are likely to reduce expected consumer welfare. A post-merger increase in investment incentives is not, by itself, sufficient to establish an “innovation defence”, as potential harm arising from higher prices for new or improved products must also be considered.
• Mergers may generate procompetitive dynamic effects through technology transfers, economies of scale, complementary capabilities, lower R&D costs or the relaxation of financing constraints. However, these efficiencies should be verifiable, merger-specific and capable of benefiting consumers. The study also proposes a sliding-scale approach under which stronger and more likely efficiencies would be required where the anticipated harm is more significant or immediate.
• For non-horizontal mergers, potential dynamic foreclosure effects such as weakening rivals’ ability or incentive to invest, expand or enter should be assessed together with efficiencies arising from the integration of complementary activities.
• The study also addresses entrenchment as a distinct theory of dynamic harm, covering transactions through which a firm with significant market power may raise barriers to entry or expansion and weaken future competitive constraints.

The framework is applied to five principal categories of transactions: pipeline overlaps, capability overlaps, acquisitions of nascent competitors, dynamic foreclosure and entrenchment. The study also includes sector-specific assessments of biopharmaceuticals, quantum computing and clean technologies.